Exercise 11.10 External Linkages, Activity-Based Supplier Costing Jackson, Inc., manufactures motorcycles. Jackson produces all the components necessary for the production of the cycles except for one (a carburetor). This component is purchased from two local suppliers: Harvey Parts and Curtis, Inc. Harvey sells the component for $64 per unit, while Curtis sells the same component for S57. Because of the lower price, Jackson purchases 75 per- cent of its components from Curtis. Jackson purchases the remaining 25 percent from Harvey to ensure an alternative source. The total annual demand is 160,000 carburetors. Harvey's sales manager is pushing Jackson to purchase more of its units, arguing that its component is of much higher quality and so should prove to be less costly than Curtis's lower quality component. Harvey has sufficient capacity to supply all the carburetors needed and is asking for a long-term contract. With a five-year contract for 120,000 or more units, Harvey will sell the component for $60 per unit with a contractual provision for an annual product-specific inflationary adjustment. Jackson's purchasing manager is intrigued by the offer and wonders if the higher-quality carburetor actually does cost less than the lower-quality Curtis carburetor. To help assess the cost effect of the two products, the following data were collected for quality- related activities and suppliers: I. Activity data: Activity Cost Inspecting components (sampling only) Expediting work (due to late delivery) Reworking products (due to failed component) Warranty work (due to failed component) $ 180,000 144,000 1,026,000 1,800,000 (continued)